The Wagner Daily | April 3, 2006

Commentary:

The broad market concluded March and the first quarter with another mixed session of price divergence. The Dow Jones Industrial Average and S&P 500, both of which have begun to lose their relative strength over the past several weeks, each shed 0.4%. Conversely, the small-cap Russell 2000 Index gained 0.3% and finished at a new all-time high. Both the Nasdaq Composite and S&P Midcap 400 indices were unchanged. The S&P and Dow each closed at their intraday lows, but the Nasdaq Composite closed just below the middle of its range.

Turnover declined in both exchanges last Friday, enabling the S&P to dodge a “distribution day.” Total volume in the NYSE declined by 3%, while volume in the Nasdaq was 12% lighter than the previous day’s level. Curiously, it was the tenth straight session of lighter than average volume in the NYSE. Have the summer doldrums already begun? Market internals were negative across the board, but only by a marginal amount. In the NYSE, declining volume exceeded advancing volume by a ratio of 3 to 2. The Nasdaq was negative by only 1.25 to 1.

Going into today, keep a watchful eye on the price action of the S&P 500. Although it broke out to a new five-year high on March 14, it has since fallen back down to its breakout point after being unable to penetrate resistance at the 1,310 level. After coming into support of its 20-day moving average on March 28, the index promptly rebounded the following day, but the recovery was short-lived. The S&P 500 attempted to break out above the prior week’s high on March 30, but that pesky 1,310 level again triggered a bearish reversal. Only two days after bouncing off its 20-day MA, the S&P has drifted back down to that level again. If it falls below its 20-day MA, the S&P will have fallen below its prior high of 1,295 that it recently broke out above. The good news, however, is that the index still remains above support of its primary uptrend line, which happens to converge with support of the 50-day moving average as well. This is illustrated on the daily chart below:

Until recently, the Dow Jones Industrial Average was leading the major indices, but it appears that money has begun flowing out of the Dow and back into tech stocks of the Nasdaq. The Dow finished last Friday below support of its prior high that it broke out above on March 14. It is now firmly below its 20-day MA and only 89 points above its 50-day MA. But like the S&P 500, support of its primary uptrend line converges with support of its 50-day MA. If you are short either DIA or SPY, it would be wise to cover, or at least tighten your stops, as the Dow and S&P come into support of their uptrend lines. The convergence of support is circled on the chart of the Dow below:

The bright spot over the past week was the performance of the Nasdaq Composite, which finally broke out of a three-month sideways range and finished the week at a fresh five-year high. Note, however, that the index is sitting only eight points above its breakout level of 2,331. With only such a small margin of clearance, the index could easily slide back into its prior trading range, so be alert if you’re long the Nasdaq or related sectors. The horizontal line on the chart below illustrates the breakout level that the Nasdaq needs to hold above:

When the Nasdaq broke out last week, we were initially very pleased because the index managed to catch up to the breakouts of the S&P and Dow. However, the problem is that the Dow has since failed its breakout and the S&P is in danger of doing the same. As such, we are now looking at the opposite problem we had several weeks ago in which the S&P and Dow were showing strength, but the Nasdaq was lagging. In theory, such a scenario should not present a challenge because one could simply buy a strong ETF such as the Nasdaq Composite (ONEQ) or short a weak one like the Dow (DIA). But the problem is that choppy and erratic trading conditions always prevail when the major indices are out of sync with one another. Such action subsequently leads to failed breakouts and breakdowns in both directions, which obviously tend to stop out traders on both sides of the market. We certainly experienced enough of that in March. Until the indices get back in sync with one another, and in either direction, we prefer to tread very lightly with regard to entering new positions. Although the overall bias is up, having a largely cash position right now is probably a safer bet than aggressively buying or selling the broad market in the short-term.

Today’s Watchlist:

We are not finding any ETF setups that provide a very positive risk/reward ratio right now, either on the long or short side of the market. As always, we will be scanning intraday and will alert subscribers via e-mail of any new trade entries.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):

Closed positions (since last report):

Current equity exposure ($100,000 max. buying power):

Notes:

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Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader